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Chapter 8: The Master Budget

Chapter 8: The Master Budget. Cost Accounting Principles, 9e. Raiborn ● Kinney. Learning Objectives . How are strategic planning and tactical planning related to budgeting? What is the starting point of a master budget, and why?

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Chapter 8: The Master Budget

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  1. Chapter 8:The Master Budget Cost Accounting Principles, 9e Raiborn● Kinney

  2. Learning Objectives • How are strategic planning and tactical planning related to budgeting? • What is the starting point of a master budget, and why? • What are the various components of a master budget and how are they prepared? • Why is the cash budget so important in the master budgeting process? • How and why are budgeted financial statements prepared at the end of the budgeting process? • What benefits are provided by a budget? • (Appendix) How does a budget manual facilitate the budgeting process?

  3. Terms • Budgeting—Formalizes plans and translates qualitative narratives into a documented, quantitative format • Budget—Expresses a commitment to planned activities, resource acquisition, and resource use

  4. Strategic Planning Strategic Planning • Long term (5 to 10 years) • Top-level management • Long-range goals, strategies, and policies • Foundation for short-term planning • Identify and gather information on key variables—both internal and external

  5. Tactical Planning Tactical Planning • Short term (1 to 18 months) • Top and middle management • Specific objectives and means to achieve strategic plans • Basis against which results can be measured

  6. Budgeting Budget • Short term • Top, middle, and operational management involvement • Usable guidelines to implement strategic and tactical plans • Allocates resources • Standard against which performance can be measured

  7. The Master Budget • A comprehensive set of budgets, budgetary schedules, and pro forma organizational financial statements • For a specific period of time • Static—based on a single level of output demand • Interactive—departments generate and consume information

  8. The Master Budget Budget Operating Budgets Financial Budgets Cash Budget Sales Budget Capital Expenditures Budget Production Budget Purchases Budget Balance Sheet Direct Labor Budget Income Statement Overhead Budget Statement of Cash Flows Selling & Administrative Budget Statement of Retained Earnings

  9. The Operating Budget Sales Budget Selling and Administration Budget Production Budget Overhead Budget Purchases Budget Direct Labor Budget

  10. Sales Forecast • Ask sales personnel • Extrapolate past trends • Use market research • Employ statistical models and simulation Sales Forecast

  11. Production Budget • Production manager combines • Sales estimates • Beginning inventory targets • Ending inventory targets • Determines the types, quantities, and timing of products to be manufactured

  12. Direct Labor Budget • Total number of people • Specific types of workers • Production hours needed • Costs • Union contracts • Minimum wage laws • Fringe benefit costs • Payroll taxes

  13. Overhead Budget • Identify activity base • Estimate overhead costs • Separate costs as fixed or variable • Show total costs for operating budgets • Show costs without depreciation for cash budgets

  14. Capital Budget • Long-term fixed asset needs • Plant • Equipment • Payment points

  15. Cash Budget • Highlights the importance of cash for an organization’s continued existence • Translates accrual-based information into cash flows • Indicates effectiveness of credit practices • Allows for planned cash borrowing or investing • Used to prepare pro forma Cash Flow Statement

  16. The Financial Budget Statement of Cash Flows Cash Budget Income Statement/ Cost of Goods Manufactured Capital Budget Operating Budget Statement of Retained Earnings Balance Sheet

  17. Budgeting Terms • Continuous budgeting • Budget slack • Participatory budget • Imposed budgets • developed by top management • imposed on operating personnel

  18. Questions • How are strategic and tactical planning related to budgeting? • What are the various components of a master budget, and how are they prepared? • Why is the cash budget important in the master budgeting process?

  19. Potential Ethical Issues • Using a single budget system globally that may conflict with national cultures • Permitting budget slack • Distorting budgeting process by treating short-term conditions as long-term ones • Using fraudulent accounting techniques to meet budget goals • Failure to communicate “big picture” assumptions to all managers participating in the budget process • Promoting “spend-it-or-lose-it” attitudes to punish cost savings and reward spending • Mandating “across-the-board” budget cuts without considering alternative cost reductions • Ignoring employee input in budgeting • Justifying management decisions by using “backwards budgeting” • Disregarding contingencies in budgeting • Ignoring external performance measures and benchmarks

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